Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not

Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Stock Expected Return Standard Deviation Beta
A 8.36 % 16 % 0.8
B 10.04 16 1.2
C 11.72 16 1.6

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

What is the market risk premium (rM - rRF)? Round your answer to two decimal places.

___%

What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

_____%

What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

_____%

Would you expect the standard deviation of Fund P to be less than 16%, equal to 16%, or greater than 16%?

1.less than 16%

2.greater than 16%

3.equal to 16%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Project Finance For Construction

Authors: Anthony Higham, Carl Bridge, Peter Farrell

1st Edition

1138941298, 978-1138941298

More Books

Students also viewed these Finance questions